Financial Accounting

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Accounting

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A system that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers.

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Decision Makers

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Internal: Managers

External: Stockholders, Investors, and Creditors

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Financing Activities

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1. Borrowing or paying back money to lenders.

2. Receiving additional funds from stockholders.

3. Paying dividends.

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Investing Activities

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Buying or selling investments such as property and equipment.

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Operating Activities

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Any day-to-day activity that is directly related to earning income.

Ex) Delivering products to customers, paying salaries, paying bills from suppliers.

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Balance Sheet

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The first of the 4 basic financial statements:

Reports the financial position of a business entity at a specific point in time in terms of assets, liabilities, and stockholders equity.

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Fundamental Accounting Equation

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Assets = Liabilities + Stockholders Equity

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Assets

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Resources controlled by the business entity; Probable future economic benefits owned or controlled by an entity as a result of past transactions or events.

Ex) Cash, accounts receivable, inventories, PPE, notes receivable, marketable securities, intangible assets, goodwill, deferred tax assets, prepaid expenses, etc.

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Liabilities

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The amount of financing provided by creditors to the business entity; Probable future sacrifices of economic benefits arising from present obligations of a business as a result of past transactions or events.

Ex) Accounts payable, notes payable, long-term debt, accrued compensation, income taxes payable, unearned revenue, etc.

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Stockholders Equity

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The amount of financing provided by owners of the business and reinvested earnings; The residual interest in assets of the entity after subtracting liabilities.

Ex) Common stock, retained earnings, additional paid-in capital (APIC), etc.

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Income Statement

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The second of the 4 basic financial statements: Reports the accountant's primary measure of performance of a business entity, revenues less expenses during the accounting period.

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Income Statement Equation

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Revenues – Expenses = Net Income

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Revenues

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Total sales (cash and credit)

Ex) Provision of services, sale of goods, rental of property,

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Expenses

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The dollar amount of resources the entity used to earn revenues during the accounting period.

Ex) Cost of goods sold, selling/general/administrative expenses, interest expense, income tax expense, depreciation expense, salaries and wages expense, etc.

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Net Income

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The excess of total revenues over total expenses.

*Not the same as "net cash generated"*

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Statements of Stockholders' Equity

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The third of the 4 basic financial statements: Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.

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The Retained Earnings Equation

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Beginning Retained Earnings + Net Income – Dividends = End Retained Earnings

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Common Stock

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The account that is equal to the number of shares issued by a corporation times the par value per share.

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Par Value

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The legal amount per share established by the board of directors that represents the minimum amount a stockholder must contribute and has no relationship to the market price of the stock.

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Retained Earnings

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The cumulative earnings of a company that have not been distributed to the owners and are reinvested in the business.

The cumulative amount of net income the business entity has earned since its organization less the cumulative amount of dividends paid since organization.

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Statement of Cash Flows

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The fourth of the 4 basic financial statements: Reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.

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Notes (Footnotes)

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Provide supplemental information about the financial condition of a business entity, without which the financial statements cannot be fully understood.

*Trend: More and more is being "buried" in the notes*

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Generally Accepted Accounting Principles (GAAP)

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The measurement and disclosure rules used to develop the information in financial statements.

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Audit

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An examination of a business entity's financial statements to make sure that they represent what they claim and conform with GAAP.

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Three Main Types of Business Entities

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1. Sole Proprietorship: An unincorporated business owned by one person.

2. Partnership: An unincorporated business owned by two or more "partners" (unlimited liability)

3. Corporation: A business incorporated under the laws of a specific state, and owned by stockholders (limited liability)

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Primary Objective of Financial Reporting

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To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

Helps assess the amount, timing, and uncertainty of a business's future cash flows.

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Relevant Information

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Has the power to influence a decision.

Timely, predictive, has feedback value

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Faithful Representation

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Requires information must be complete, neutral, and free from error.

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Fundamental Assumptions

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1. The Separate Entity Assumption: A business's activities are accounted for separately from those of its owners.

2. The Continuity Assumption: Businesses are assumed to continue into the foreseeable future.

3. The Stable Monetary Unit Assumption: Accounting information should be measured and reported in the national monetary unit without any adjustment for changes in purchasing power.

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Account

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A standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item.

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Additional Paid-In Capital (APIC)

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The amount of capital contributed by stockholders less the par vale of the stock.